TALKING POINT : FINANCING HOTEL SCHEMES

The last few years has witnessed a new trend in the hotel sector. Global brands such as Hilton, Holiday Inn and Marriott have separated hotel ownership from operations by selling their properties whilst retaining the management rights. Not only does this preserve a profitable enterprise for the hotel chains, but it has created a massive increase in property transactions. As a result, branded hotels are now a very attractive segment within the property sector with investment yields compressing from over 10% to around 6%.

An interesting side effect of this trend is the positive impact upon hotel property valuations alongside lending banks' willingness to increase secured loans to hotels (as measured by loan to value "LTV"). This key metric has increased from 50% in the not-too-distant past to 80% for 'blue chip' schemes.

In this context, 'blue chip' can be defined as a prime hotel site offering 100 plus bedrooms, marketed under a top hotel brand and owned by experienced hotel investors. It also helps if the investors own a portfolio of branded hotels which is likely to command a lower yield on disposal.

The financial impact of these developments can be illustrated by examining the cost of finance in BEFORE and AFTER scenarios.

This table illustrates how the same development scheme could require 22% less profit to be viable - or, alternatively, could offer a 12% better return to the promoters.

With other types of commercial property commanding yields as low as 4%, the hotel sector is expected to continue to enjoy its new-found appeal with investors. From a developer's perspective, there is still a significant opportunity to meet increasing demand for select service hotels such as Encore by Ramada and the next generation of Courtyard by Marriott, Express by Holiday Inn and Garden Inn by Hilton.